E-Business with Jeff Bezos

Just 5 years old, Amazon.com is the bellwether for dotcom retailers, and founder and CEO Jeff Bezos is the person to talk to when stock market players get the e-jitters over turbulence in the new economy.

At the company's offices in a converted Seattle hospital, CIO contributing writer Malcolm Wheatley spoke with Bezos and two of his key vice presidents-Jeffrey A. Wilke, general manager of operations, and customer service head Bill Price.

CIO: Customer service-or the "end-to-end,click-to-ship customer experience," as you call it-is a vital part of Amazon.com's competitive edge. But why did you choose that as a competitive differentiator and not, say, price or choice? Bezos: We've studied this, and there are several things that are important to Amazon.com customers. People care about selection, people care about price, and people care about service. They also care about rich information-so that they can make a better purchase decision-and about ease of use. So we focus on all of those things.

But the end-to-end customer experience is more important than these and is even more important online than it is in the physical world. And the reason is that online the word-of-mouth impact is amplified. Every Internet customer has a big megaphone, and if we make a customer unhappy, they don't tell five friends, they tell 5,000. And the reverse is true: You create evangelists. If you do a great job for customers, then they tell 5,000 friends in newsgroups and listservs and chat areas etcetera-so online, your marketing dollars are best spent building great customer experiences.

Do you have any numbers or statistics to support that? Bezos: We believe, based on surveys that we have done, that more than half of our new customers come to us through word of mouth. And I can tell you that in our first year we did not do a dollar of paid advertising, and we still grew incredibly fast. Today, we do a significant amount of paid advertising, but it still accounts for less than half of our new customers.

Two years ago, we were only in the United States and only in books. We weren't selling music or videos, or any of the other product categories we now sell, and we didn't have Amazon.co.uk or Amazon.de. And two years later, although our U.S. book business has continued to grow rapidly, more than half of our revenues come from these new categories and businesses. And a lot of that has also been word of mouth.

Won't the importance of the Amazon.com brand diminish in the coming era of Internet-based comparison shopping, when people use "intelligent agents" to search the Net for the best price? How will you compete then? Bezos: Well, first, we'll just have the best price. That's the simple approach.

What people miss on the pricing front is that e-commerce is a scale business-meaning that your costs are largely fixed, and as your business grows, you are able to offer lower prices. So it should be possible for us to not only have the lowest prices but also the best service. And that is counterintuitive because in the physical world, which is a variable-cost business, you intuitively know that you can't offer the best service and the lowest prices-there's a trade-off. But that trade-off breaks down in the online world.

Secondly, we will be that shopping agent-that's what we're trying to do: to be that personalized shopping agent that not only finds you the best price but also the best product. This is a much more sophisticated thing to do than a situation where you already know what you want, and the shopping agent is simply trying to find the best price.

This is where all the data you're collecting on consumer buying habits and patterns fits in, right? Bezos: It's hard to do it on the scale that we're attempting-with millions of customers-but our vision is that if we have 20 million customers, then we should have 20 million stores: If you never buy romance novels, then we shouldn't clutter your view with them. If you like literary fiction, then we should tilt your store toward literary fiction. The way to think about it is as a return to days of yore, when your small-town merchant knew you as a person and knew your tastes, and would say, "Look, I know you buy John Irving, and there's this new author who you're going to love." We [achieve this level of personalization] with technologies like collaborative filtering.What you do is look at all the things that an individual customer has purchased from us, and then look at all our other customers to identify those customers who have similar tastes and purchasing histories. Then, in a statistical way, we merge those customers into something that you can think of as being electronic soul mates. And then we look at the things that one electronic soul mate has purchased but that this [other] particular individual customer has not. And then we recommend those things.

Any other examples? Wilke: One of the things that differentiates us from other retailers is the way we hold inventory as a network. It's uneconomical on sheer cost grounds to hold all the items we stock in each of our distribution centers, so our objective is to get better at predicting which items people buy together-which is another way we mine the data. At present, if we predict wrongly, we try [and pay to bring items] to the applicable distribution center to meet a particular shipment, but if we can't do this in the time frame that we promised the customer, then we'll split the shipment. And we'll pay for the split. We probably have one of the richest mathematical opportunities available anywhere. That's why the professors are calling us-and want to work on it with us. Although our algorithms are getting better fast, they are still in their infancy. And they are not something that we talk about. But we do have some pretty neat people working on them.

You've sued Barnes & Noble Inc. for infringing on your "1-Click" patent on its website. It's clear from the "open letter" defending your position on the patent issue on the Amazon.com site that this is a sore point for many people.Don't you think this sort of behavior stifles innovation and is ultimately bad for consumers? Bezos: Certainly, that particular patent doesn't. But I do think that there's a problem with patents-both software patents and business process patents-in that their lifetime is too long. If you're building a physical process, then maybe 17 or 20 years is a reasonable patent lifetime. But if you're doing a piece of software or creating a business process, then three to five years should be enough-but that's not the way the patent system works.

Don't you worry that this change would benefit larger companies at the expense of smaller ones? Bezos: I don't think so. I don't see that. I mean, it would also benefit small companies because they wouldn't come up against having to license a 17-year patent. Big companies get most of the patents, and small companies run into them and have to license them. So I think if anything, [such a change] would probably disproportionately benefit smaller companies.

With the Nasdaq tech slide and the collapse of a number of so-called new-economy businesses, are you worried that your customers will worry about Amazon.com's viability? Bezos: No, I don't think customers are worried. I think there are two frames of mind regarding Amazon.com. Take the worst possible scenario: a day trader who is also a customer. And even in that extreme example, I think people have two very different spaces in their brain. One thinks about Amazon.com the stock, and the other thinks about Amazon.com the service. So no, I think our customers are happy to see us grow and take on new offerings and continue to develop our business. Regarding the stock market's reaction, I'm very happy to see the stock market start to discriminate with respect to these different kinds of new economy companies. If our stock has to suffer so that those companies whose business plans do not make sense are no longer able to get funding, then that's probably a good thing for us in the long term.

In the meantime, of course, many of your employees are also suffering, thanks to stock options that are underwater. How does that feel? Bezos: When you use stock ownership as an important part of compensation, you're doing something that on the face of it is nonsensical. You're outsourcing to Wall Street this very important thing called your compensation strategy. And what company in its right mind would outsource its compensation strategy to a third party? But the upside is that you are really making owners of everybody in the company. If you want people to behave like owners, you have to actually make them owners-there are no shortcuts to that process. And ownership obligates you to think long term-and if you think long term, then these daily, weekly or monthly periods of volatility in the stock market shouldn't worry you very much.

Maintaining morale in customer service operations is notoriously difficult, anyway, without the tech slide. Won't your focus on customer service be an enormous hostage to fortune if you don't get it right? Price: Well almost every one of my senior managers began as a customer service rep. Even though it's a young company, [these managers] came up through the ranks and they've been through the wars, and that has given them a valuable perspective. The holiday season, for example: It's a hot time, and it's important to know what to do and how to do it.

Hiring is critical, too: I know from past experience that many call centers hire people who are shocked when they find out they are expected to sit in front of a monitor with earphones on all day. And we don't just move people up through the ranks, we also transfer a lot of people out into other areas [like] business development, marketing, IT and Web development-it's an exciting career path, and many of our reps come in with that in mind. It's only when we can't do that or can't meet those expectations or set the right tone about the challenges of the holiday season that morale problems creep in.

How do you manage the mix of phone calls versus e-mail that your customer service reps must handle? Price: Well we're very different from a conventional call center operation because 70 percent of our contacts are e-mail. E-mail can be scheduled and queued and managed differently. It's not the constant bombardment of phone calls coming in, or the sense of constant connectedness that you find in an outbound telemarketing call center. Most call centers are 95 percent phone, 5 percent something else. We're very fortunate that we haven't got that.

Some of our reps love being on the phone for six to eight hours a day, and they handle e-mail for the remaining part of their shift. Others are really good at e-mail and have excellent written communication skills and craft terrific answers, and we can arrange for them to spend most of their shift doing e-mail.

Although the original plan was for an eight-hour shift spilt equally between e-mail and phone calls, we've found that it makes sense to provide greater variety than that. Some reps do six to eight hours a day of just phone calls.

Some do six to eight hours a day of just e-mail. Others do a blend. We schedule people for [shifts working on] phones or e-mail--but then, because all our people are cross-trained, we can redirect certain members of our teams during the day if we're getting more phone calls than we anticipated, or if our e-mail queues are getting longer, and we want to bring them down. But as an employee, at any one time you'll be handling a block of calls or handling a block of e-mail. It's not like you're getting a call. With the benefit of hindsight, could you have handled the layoffs of 150 people in January any differently? Bezos: Yes, it could have been handled differently. But while it was happening--and especially while it was happening, but even afterward--you could look at it mathematically and say, we hired 5,000 people in the year and we laid off 150, which is just 2 percent of the company, which didn't seem like very much. But in fact, it was very hard on all of us, and I don't think that we understood how personally distressing it was going to be for all of us. So I think, yeah, there probably is a better way to handle that, even though that is traditionally how companies handle these things. But some of the costs of that are hidden.

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